As the Netflix stock price crashes, is the lockdown tech boom over?

After the streaming service reported weak results, the Netflix stock price dived. Is the lockdown tech boom over, or is this just a blip?

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Since Meltdown Monday (23 March 2020), global stock markets have soared. The FTSE 100 index has gone from 4,993.90 points to 6,873.16 as I write. That’s a gain of almost 1,880 points — nearly two-fifths (37.6%) — in 13 months. But the Footsie’s gain has been trounced by the S&P 500 index. Over the same period, the US index has soared from 2,237.40 points to 4,134.94. That’s up nearly 1,900 points — almost six-sevenths (84.8%). One US stock that has slightly lagged the S&P 500 since March 2020 is Netflix (NASDAQ: NFLX). Alas, the latest results from the video-streaming service sent the Netflix stock price plunging.

The Netflix stock price soared in 2020

The Netflix stock price had a great 2020. It ended 2019 at $323.57 and rose steadily in early 2020, before dropping back to close at $298.84 on 16 March. That’s pretty good, given that stocks were crashing spectacularly back then. As the world went into deep lockdowns, Netflix stock went on a winning streak. At end-2020, it closed at $540.73, adding $217.16 and surging by close to two-thirds (67.1%).

The theory behind this powerful price rise was simple. With people bored and confined to their homes, Netflix subscriptions would rocket. And they did — in 2020, at least. Driven by expectations of rising revenues and subscriber growth, the Netflix stock price hit a 2021 closing high of $586.34 on 20 January.

Netflix slips up in 2021

After the US market closed on Tuesday, Netflix issued its first-quarter results. Last year, Netflix added 15.8m new subscribers, at an average of close to 4m per quarter. It expected 6.25m new sign-ups between January and March, but gained only 3.98m new subscribers. Netflix blamed this shortfall on a lack of new shows due to Covid-19 production delays and cancellations. Also, Netflix warned that it expected to gain only 1m new customers in Q2, down from its previous target of 5m. This setback had an immediate impact on the Netflix stock price.

Having closed at $554.44 on Monday, the Netflix stock price slipped to $549.57 at Tuesday’s close, down 0.9%. But in after-hours trading, the Netflix stock price crashed as low as $484.35, plunging $65.22 (an initial decline of 11.9%).

Is Netflix a sign of a tech turnaround?

Some investors are asking whether these weak results from Netflix could indicate more bad news to come for highly valued US tech stocks. They argue that, as lockdowns end, billions of us will return to living and spending in the real world. This would have a detrimental effect on tech stocks grown accustomed to reporting huge growth rates of late. I’m not so sure. After all, the Netflix stock price has since bounced back to trade at $504.89, down $44.68 (8.13%) as I write and just before the market opens.

For the past decade, Netflix has enjoyed a charmed life of near-constant growth in subscribers and revenues. But now it faces fierce competition from rival streaming services, including Disney Plus, Amazon Prime Video, HBO Max, and Hulu. Since launching in November 2019, Disney Plus has captured over 100m users, grabbing 50m in its first five months. Today, with 207.6m subscribers, Netflix is clearly feeling the pressure as subscriber growth dries up.

The overnight fall in the Netflix stock price has lopped around $19.8bn from its market value. But, given the trillions invested in US tech stocks, this is insignificant. I’d need to see a lot more earnings reports before worrying about the ‘tech lockdown trade’ ending. Meanwhile, I’ll keep buying cheap UK value stocks!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Netflix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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